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Curious Cat Kivans

Investing and Economics Blog

The Great Convergence by Richard Baldwin makes some interesting points about “globalization.” I actually find the long term history the most interesting aspect. It is very easy for people today to forget the recently rich “West” has not always been so dominant.

China and India/Pakistan accounted for 73% of the world manufacturing output in 1750. They continued to account for over half of global output even as later as 1830. By 1913, however, their share had dropped to 7.5%.

That shows how quickly things changed. The industrialization of Europe and the USA was an incredibly powerful global economic force. The rapid economic gains of Japan, Korea, Singapore, China and India in the last 50 years should be understood in the context of the last 200 years not just the last 100 years.

A central point Richard advocates for in the book is realizing that the current conditions are different from the conditions in which traditional economic theory (including comparative advantage) hold. The reasoning and argument for this claim are a bit too complex to make sensibly in this post but the book does that fairly well (not convincingly in my opinion, but enough to make the argument that we can’t assume traditional economic theory for international trade is completely valid given the current conditions).

Freer trade does allow all nations to gain by “doing what they do best and importing the rest.” But the fact is that TPP is much more like the soccer coach training the other team. TPP will make it easier to move advance know-how to low-wage nations – an outcome that is not covered by Adam Smith’s reasoning.”

I don’t expect this blog post to convince people. I don’t even think his book will. But he makes a case that is worth listen to. And I believe he is onto something. I have for years been seeing the strains of “comparative advantage” in our current world economy. That doesn’t mean I am not mainly a fan of freer trade. I am. I don’t think complex trade deals such as TPP are the right move. And I do think more care needs to be taken to consider current economic conditions and factor that into our trade policies.

Richard Baldwin uses 3 costs and the economic consequences of those changing over time to show globalizations history, where we are today and where we are going.

The cost of moving goods came down first, followed by the cost of moving ideas. The third constraint, the cost of moving people, has yet to be relaxed.

It isn’t very easy to follow but the book provides lots of explanation for the dramatic consequences of these costs changing over time.

One of his themes is that mobility of labor is still fairly costly. It isn’t easy to move people from one place to another. Though he does discuss how alternatives that are similar to this (for example telepresence and remote controlled robots to allow a highly technical person to operate remotely) without actually do moving the person are going to have huge economic consequences.

The “high spillovers” are the positive externalities that spin off of a highly knowledgable workforce.